Source: Global Network
According to a report by Global Network reporter Jiang Ailing, "The Federal Reserve's interest rate hike has squeezed key allies of the United States." The Wall Street Journal reported on the 23rd that during Biden's presidency, the South Korean US alliance was strengthened, but the South Korean economy fell victim to the rapid rise in US interest rates. This report has also received attention from Korean media.
The Wall Street Journal reported that since the beginning of 2022, the Federal Reserve has embarked on a historic interest rate hike, attempting to control inflation, which peaked at 9.1% in the middle of last year. Subsequently, many central banks around the world followed these measures, partly in order to protect their own currencies. Yonhap News Agency mentioned that South Korea's central bank has also raised its benchmark interest rate 10 times in less than a year and a half, maintaining it at 3.5% since January this year.
Yonhap News Agency continued to state that South Korea's interest rate hike also aims to control the domestic price rise rate and the housing market. However, the South Korean economy is currently showing an increasingly unstable trend, and the uncertainty of US interest rates has also brought troubles to the Central Bank of Korea. Frederick Newman, Chief Asia Economist at HSBC Holdings, said that "the Federal Reserve (raising interest rates) has constrained the hands of South Korean banks", and "if the Federal Reserve maintains high interest rates for a long time, the South Korean economy may weaken, which will create another unfavorable factor for economic growth".
The report also said that after the COVID-19, South Korea's consumption boom stalled, housing prices fell into a long-term downturn, and economic growth slowed down. The International Monetary Fund (IMF) predicts that South Korea's economic growth rate this year will be only 1.4%. Due to the Federal Reserve raising interest rates four times this year, the interest rate gap between South Korea and the United States has widened by about 2 percentage points.
Yonhap once again quoted the Wall Street Journal as saying that despite the strengthening of the South Korean US alliance during Biden's presidency, the South Korean economy has become a victim of the sharp rise in US interest rates. This situation demonstrates how the Federal Reserve's decisions and the uncertainty surrounding them have a ripple effect on a global scale. Yonhap also mentioned that the conflict between Israel and the Palestinian Islamic Resistance Movement (Hamas) has led to an increase in international oil prices, which is another challenge for the South Korean central bank.
Previously, according to a report by Yonhap News Agency on October 19th, although South Korea's actual gross domestic product (GDP) growth rate in the second quarter of this year (0.6%) was greater than that of the first quarter, residents' consumption, imports and exports, investment, government consumption, etc. all shrank. Due to the greater decrease in imports than exports, there has been a surplus in trade balance. The industrial activity trend statistics in August show that the retail sales index has been declining month on month for two consecutive months, and consumption of durable and semi durable goods is sluggish. The report suggests that if the central bank only focuses on the sluggish economy and is eager to cut interest rates, household debt, exchange rates, prices, etc. will be worrying. Cao Yongwu, a researcher at LG Business Research Institute, previously stated that with the increasing possibility of economic slowdown in major countries such as the United States and China, it is difficult for the central bank to raise interest rates, leading to further economic contraction. Under the impact of the outbreak of the Israeli-Palestinian war, the pressure on rising prices may intensify, but it is also difficult to implement interest rate reduction policies. This "dilemma" is likely to persist until the first half of next year.
The impact of the US economy and related policies on the global economy continues to spill over. Previously, the United Nations Conference on Trade and Development warned in a report that major central banks around the world, led by the United States, continued to raise interest rates and sell assets, causing rising borrowing costs for businesses. Given the current high leverage ratio of non-financial enterprises, non-performing loans may sharply increase and trigger a wave of bankruptcy. The report urges developed economies to change the direction of monetary and fiscal policies to avoid more serious losses to the global economy than the international financial crisis in 2008 and the COVID-19 in 2020.